October 14, 2015 11:57 am
An economic recovery in the world’s advanced economies and strong consumer spending look set to keep Germany’s economy growing this year, despite a slowdown in emerging markets and corporate scandals at home.
The eurozone’s largest economy, often hailed as its powerhouse, has been a bastion of strength in recent years but faces significant risks. Signs of a slowdown in China and Russia’s economic woes have left its exporters exposed at a time when the Volkswagen emissions scandal has sparked questions about the solidity of the Made in Germany brand.
A closely watched indicator of economic sentiment, compiled by German think-tank ZEW, fell in October. The ZEW poll, published on Tuesday, showed a balance of 56 per cent of the analysts polled expected conditions for Germany’s automobile manufacturers to worsen. Carmakers account for 18 per cent of all exports.
“The exhaust gas scandal of Volkswagen and the weak growth of emerging markets has dampened the economic outlook for Germany,” said Clemens Fuest, president of the ZEW.
The potential of these threats to weigh on growth is supported by hard data last week that showed exports declined in August. The export data followed worse than forecast figures on industrial orders.
The declines are partly explained by idiosyncrasies in German school holidays that meant workers took more leave in August this year. While changes in working days can be ignored, the preliminary export figures showed a sharp slowdown in trade outside the eurozone that laid bare the impact of weaknesses in the Chinese and Russian economies.
German GDP growth between the first and second quarter was underwhelming. The same figures for France, its biggest trading partner, dashed expectations too.
For Germany, trade is vital. Few countries were as drastically affected by the collapse of global exports that followed the unravelling of US investment bank Lehman Brothers in autumn 2008. In 2014 its trade balance — exports minus imports — was 7.5 per cent of GDP, one of the highest in the world.
But while trains travelling from Germany to China laden with car parts and machinery are starting to lighten and the euro has not weakened by as much as exporters here would have liked, companies looking west are having more success.
Some economists believe the strength of economies such as the US and UK, two of its three largest trading partners, coupled with a more tepid recovery in the eurozone will prove enough to keep trade growth on track.
Stefan Schneider, chief German economist at Deutsche Bank, said: “There are more clouds on the horizon, but it’s not the case that we’re in the same situation now as in 2008 and 2009 where there was a total collapse of world trade. Exports to the biggest market outside Europe, the US, have been stellar in recent months.” Trade with the UK, a bigger importer of German products than China, has also held up well.
Deutsche Bank expects growth of 1.7 per cent in Germany this year. It has recently upgraded its projection for next year to 1.9 per cent because of an expected boost to domestic demand due to the arrival of what is projected to be more than 1m migrants during 2015.
While the emissions scandal is a disaster for one of Germany’s biggest companies, the country’s reputation does not rest on it alone.
“Volkswagen is one of the best-known German brands, but Made in Germany is more than Volkswagen,” Mr Schneider said. “Its success is not just the result of a few large companies, but is deeply anchored in numerous and diverse ‘Mittelstand’ companies.”
Within Germany, a combination of low oil prices, a strong labour market and cheap credit have boosted consumer spending.
“The performance of the domestic economy is still good and the euro area economy continues to recover,” said Mr Fuest. “That makes it rather unlikely that the German economy will slide into recession.”
While the economy is expected to grow at a respectable pace this year, an overreliance on trade and domestic spending leaves Germany prone to longer-term problems.
Jörg Krämer, chief economist at Commerzbank, which is forecasting an expansion of 1.5 per cent this year, has warned that German officials risk becoming complacent. He believes weak infrastructure investment, higher labour costs, the rollback of past labour market reforms and an ageing population are eroding competitiveness.
“The perception of Germany as the eurozone’s economic powerhouse is exaggerated, but so was the sick man of Europe label 10 years ago,” said Mr Krämer. “But there’s a dangerous attitude among politicians that the German economy will remain solid. The view that so long as the budget is balanced, Berlin doesn’t need to act is unsustainable — structural reforms are an urgent necessity.”